The Hidden Costs Of Renewable Energy

At least $9.7 trillion will be invested in power generation between 2012 and 2035, according to the International Energy Agency. 71 percent of that will be spent on renewables and clean energy technology. Developed countries are in the process of energy substitution, and even emerging economies are currently putting more money into renewables as costs drop and it becomes economically competitive with traditional energy sources. But putting money into clean energy has hidden costs that need to be accounted for so that the these enormous capital expenditures are spent efficiently.

Solar energy costs have fallen 75 percent

“The fastest reductions in cost have been seen in the solar sector where the price of an average panel has fallen by 75 percent in just four years,” says a new Citi report, Energy Darwinism. Unlike other energy sources, solar is based on chip technology that is extremely similar to what is used in computers and has benefited from the same technological advances. This has caused prices to plummet, while other sources become gradually cleaner and cheaper. Solar is still at the top end of the cost curve, but it is competitive with some sources of gas, and it will become even cheaper in the coming years.

But a big move into solar, or other renewables, comes with extra costs that are usually not borne by the companies that develop the electric generation facilities. Renewable power generation is normally further from population centers than traditional plants and is composed of a larger number of relatively small facilities. That means that the power grid has to be more complex and has to transport energy across larger distances, both of which increase cost.

Intermittent nature of renewable energy can be most problematic

But it’s the intermittent nature of renewable energy that can be most problematic if it isn’t planned for. Germany, having pursued solar energy aggressively, is a case study in what can go wrong.

Solar energy plants are most productive during the middle of the day when electricity prices are normally at their highest. This is great for peak shaving—handling the excess load during the middle of the day. But excess solar power means that other facilities are losing money. This would be fine if the plants were actually becoming obsolete, but they are still necessary at night and during the winter, so the presence of too much solar puts Germany in the awkward situation of relying on electric plants that don’t have a profitable business model. Some gas plants ran for as little as ten days last year, but if all of these under-utilized plants closed their doors Germany would have an energy crisis come winter.

Other renewables have similar quirks that make them difficult to use as the backbone of a country’s power grid (except for nuclear, which carries an entirely different set of risks), but developed and developing economies are both putting more money into renewables.

In the long run, discarding dirty energy is a good thing

“That in a majority of cases these costs are not borne by the developer of the renewable asset,” Citi’s report says “but either centrally or indirectly by customers by means of a ‘renewables surcharge’ and hence are not necessarily a deterrent to developers who focus more on the economics of the project.”

This can be seen as a triumph for both the green energy movement and industrial innovation, and in the long run, moving away from dirty energy is certainly a good thing. However, the separation between the people building plants and the ones who pay for its operations could create more complications like the ones Germany is now facing.